WHAT IS LADDERED TERM LIFE INSURANCE
Laddered Term Life Insurance can save you thousands of dollars over the years, and insure you for the proper amounts that correspond with your family’s life events. What do we mean by “Laddering” Term Life Insurance? Think of it this way…The younger you are, you typically need higher amounts of life insurance. The older you get, the less you need. So, instead of buying $2,000,000 for 30 full years, why not purchase Level Term Life Insurance in amounts that decrease over time to match the end of various financial obligations. As time goes on, not only does the coverage decrease, but so do the premiums you have to pay.
Classic Example of a Young Family’s Life Insurance Needs
First, we start with the amount of Life Insurance that you will need the longest. In this instance it’s for income replacement over 30 years in the amount $2,000,000. Take for example the family that you are the sole income earner, after your children are out of college, your small business loan is paid off, and your mortgage payments have ended. Now all you only need is enough to replace your income to help your spouse reach retirement age without creating a hardship because he or she was the homemaker.
Second step is to determine the next longest financial obligation which is the mortgage which you plan to have paid off in the next 20 years. This also corresponds with the your youngest child earning their Bachelors Degree. The total amount of those two obligations are about same equaling $500,000 and will end around the same time.
The last step is estimate how much you need to pay off your debt that ends the soonest which is your small business loan and your oldest child graduating from college which will be complete in 10 years. That totals about A$250,000.
Summary of Scenario
- 10 year term for $250,000 pays off the business loan and oldest child’s education
- 20 year term for $500,000 pays the mortgage and youngest child’s education
- 30 year term for $2,000,000 replaces income until retirement
If a 35 year old male purchases a 30 year term for $2,750,000,000, his premium would be about $1,800 per year totaling $54,000 over 30 years . If the same client ladders the policies as described, he could pay only $46,000 over the next 30 years. Obviously differing amounts and terms can provide lower or higher savings. It makes a bigger difference when the shorter periods of time are a much higher percentage of the total.
Insurance Companies offering Laddered Term Life in One Policy
Banner Life’s OPT Level Term product has an optional rider to ladder policies all within the same policy. Our clients who have purchased this product have saved an average of $60 on each rider amount over the base because they aren’t charge an application fee for each one. With Banner’s rider, you pay only one policy fee no matter how many more Levels are added.
The Banner Life OPT policy works like this…The amount needed for the longest period of time is the Base Policy. You can add additional years including 10, 15, 20 or 25 year terms. Each rider will automatically fall off as the term expires which in turn reduces the premiums with each rider termination.
The idea is to only pay for what you need instead of a flat premium for the full term period. Understand that the higher the death benefit, the lower cost per thousand of life insurance, but the longer the term period, the higher the cost per thousand. This is where we come in and work with our clients on how to get the best for less.
Laddering Term Life insurance policies is becoming more popular even though agents have been doing it for their clients for years. We used to refer to it as “stacking” but “Laddering” has replaced this terminology. For many years it was and still is a strategy to compete with Whole Life policies.
Every agent has their own opinion as to buying Term vs Whole Life. Whole Life polices are typically carry significantly higher premiums, but some will argue that at least when the need is over, the insured has cash to show for all the money they put in. Other companies like Primerica don’t even offer Whole Life insurance and their motto is “Buy Term and Invest the Rest.”
We don’t believe that either way is better for everyone and it truly depends on the situation and circumstances. We do however embrace the idea of buying term insurance because it is the purest form of life insurance and laddering term policies is a great way to cut your costs even more.
ARE YOU CONSIDERING A LADDERED TERM LIFE POLICY AFTER THE AGE OF 50?
Most of the time, when it comes to Term Insurance, we talk about younger individuals who will eventually have significant savings, investments, real estate, and other liquid assets to cover a funeral and the other expenses that go along with it when they are older. What about the Millennials and late Boomers that could never get ahead, or maybe lost everything and had to start over? Unfortunately we deal with this situation all too often, but you just don’t hear about it.
It’s not uncommon for someone in their 50’s or 60’s to remortgage their home that they thought would be paid off by retirement. These families, especially the ones who depend on two incomes are usually faced with three financial problems into retirement. They need enough funds to pay off the mortgage, replace the income of the spouse who died, and have money set aside for funeral expenses.
If you don’t have the cash to cover even one of these, an economical way to resolve this is by laddering one Term Life policy to pay off the mortgage, a second Term Life policy that can be annuitized to replace income and finally a small Whole Life policy to cover Final Expenses. To make this work even better, if both spouses rely on the other’s income in addition to their own, the term policies can be written as a “First to Die” saving even more in premiums and maximizing coverage on both the husband and wife.
If this is somewhat reflective of your situation, give us a call at 614-402-5160 and we’ll help develop a plan that works for you.